If This Is Recovery...

No one goes into Wal-Mart and asks to pay extra sales tax. Thus sales taxes
are reasonable barometers for retail sales. This week we look at how taxes
are doing in a period of economic recovery. Then we turn our eyes to a very
interesting (and sobering) analysis of possible future unemployment rates.
This is an anecdote to the happy-face analysis of employment numbers you get
from establishment economists. There will be a lot of charts and tables, so
this letter may print a little longer, but I think you will find it very interesting.

If This is Recovery, Where Are the Taxes?

I keep reading about surveys that show that retail sales are up. But as noted
above, no one pays extra sales taxes, or decides they need to pay more income
taxes. The surest way to measure retail sales is sales taxes. Want to know
how incomes are doing? Look at income tax receipts. Let's look at sales taxes
first.

First off, I can find no single source of recent sales tax information. It
is all one-off, but it is consistent. Sales taxes in my home state of Texas
are down 12.8% year-over-year, and we're in the fifth straight month of decreases
of 11% or more. Projections are for sales taxes to continue to decline into
2010.

There is a very revealing study by the Pew Center on state taxes, called "Beyond
California" (http://www.pewcenteronthestates.org/).
Everyone knows how bad California is. The Pew Center looks at how the rest
of the states are doing, and focuses on 10 states that also have severe problems.
Sales tax receipts are down 14% in Arizona, and state income taxes are down
32%.

The Liscio Report notes that all states had negative year-over-year sales
tax collections in October, and the weighted average decrease was 10.2%, down
from a negative 7.2% in September. (www.theliscioreport.com)

Sales at Wal-Mart stores slipped by 0.4% in the third quarter. Actual government
figures show that retail sales were down 1.5% in September from the previous
month and 5.8% year-over-year. So how do we keep seeing headlines about retail
sales being up, as unemployment keeps rising?

Remember that such reports are usually based on surveys, and generally cover
mid-sized and up retailers, leaving out smaller businesses. Further, if you
are a retail chain that has closed 10% of its stores, the remaining stores
should in theory benefit from getting your loyal customers into them.

Last Business Standing

Yesterday I was with an associate, and I hesitated in asking them how their
business was doing, because I knew things had been tough at the beginning of
the year. But I did ask, and they said sales were up over the last months and
business was looking better. Surprised, I asked them what made the difference. "Ah," they
said, "less competition. Our competitors have gone out of business."

Best Buy and other electronic retailers had to benefit from Circuit City disappearing.
That is Schumpeter's creative destruction at work. Not very good for total
employment, but it does help the profitability of the survivors.

So, if things are so bad, how did we have 3.5% growth in the third quarter?
First off, things are not as bad as they were in the past year. We are in fact
getting close to an economic bottom, at least for now. Second, the 3.5% number
is a preliminary estimate. A study by Goldman Sachs suggests that the number
will be revised down by at least 0.5% and maybe as much as 1%.

Why? The estimate does not really take into account how poorly small businesses
are performing. If you look at small-business indexes and compare them to historical
GDP numbers, you get the smaller number mentioned above. And since at least
2% of the GDP was from the stimulus package (Cash for Clunkers, houses, tax
cuts), the economy on its own was flat. That begs the question, what happens
when the stimulus runs out?

And the answer is that we won't know for some time, as the stimulus is just
getting ramped up. "According to CBO estimates, only 21% of [the stimulus]
spending will occur in 2009; another 38% will come in 2010, and 22% in 2011.
After that, its effect will dissipate quickly." (The Liscio Report)

But David Rosenberg notes that what the federal government is giving, the
states are taking away. The Pew Study shows that at least nine other states
are in appalling shape, so it is no wonder that David writes:

Stimulus, What Stimulus?

"Fully nine states are in fiscal distress and only two have balanced budgets.
States like Michigan are planning 20% budget cuts for the coming year. Indiana
is planning a 10% spending cut in light of a 7.4% YoY revenue decline. How
can the economy really be out of recession if government revenues are still
deflating?

"The states are filling around 40% of their fiscal gaps with the federal stimulus
(so much for spending on "shovel ready" infrastructure projects). Even after
the fiscal help from Washington, the state governments will still face a projected
deficit of $142 billion for 2011 (versus $113 billion in 2010). All in, the
restraint in the state and local government sector is estimated to drain a
full percentage point from U.S. GDP growth in 2010 and more than fully offset
the stimulative efforts from Washington. The U.S. economy is more likely to
post growth of little more than 2% next year, rather than the 5% currently
being discounted by the equity market."

The Reality of Unemployment

All this is, of course, going to put continued pressure on employment. As
I noted last week, the number of unemployed actually soared by 558,000, to
15.7 million, as measured by the household survey, not the 190,000 you read
about in the mainstream media. Unemployment is sadly continuing to rise by
significant amounts.

In August, I did an interview with CNBC from Leen's Fishing Lodge in Maine.
The unemployment numbers had just come out. I did a back-of-the-napkin estimate
that we would need about 15 million new jobs over the next five years just
to get back to where we were when the recession started.

That works out to a need for about 125,000 new jobs each month to handle new
workers coming into the market (which comes to a total of 7.5 million over
five years), plus the 8 million and rising jobs we've lost. That is a daunting
number. It amounts to 250,000 new jobs a month every month for five years.
And we are still losing more than that number a month, let alone adding the
needed 250,000.

Look at the chart below. It shows the establishment survey employment figures
for the last ten years. Only once, in 1999, did we actually add over 250,000
jobs a month for a whole year. And that was during the internet boom.

Sadly, the private sector has shed over 300,000 jobs since 1999. Think about
that. We have had a decade where there have been no new jobs added by the private
sector. Real incomes are roughly where they were, and the stock market is down.
Talk about a lost decade.

I love it when someone does the really heavy lifting for me, and my friend
Mike Shedlock of Sitka Pacific Capital Management has done a wonderful job
of taking that speculation of mine and putting it into a spreadsheet that helps
us get a real handle on what unemployment is likely to look like for the next
ten years. I am going to make use of his basic analysis and then modify some
of his assumptions in the spreadsheet he provided me, in order to think about
different scenarios.

All three scenarios are based on assumptions, so let's see what Mish started
with. There is a wealth of data available from the Bureau of Labor Statistics
and the Census Bureau. According to the Census
Bureau Population Estimates we are going to add about 2.5 million working-age
(16 years old and up) citizens a year, from now until 2020. The numbers varies
slightly year to year. Mish used an estimate of the average, summing up the
buckets from 16 to 100+ for the years in question and rounding the result.

You can go to the BLS site and look at Table A-1, which shows the civilian
noninstitutional population (those over 16 not in prisons), the participation
rate (those who are working and/or want to work), the unemployment rate, the
number employed, those not in the labor force, and those who want a job. Those
are starting numbers for the charts below.

Starting in 2013 the labor pool will start decreasing because of Boomer
demographics.

The noninstitutional population will rise by 2.5 million workers a year.

The spreadsheet below needs a little explanation. Let's start with the assumptions.
Mike starts with current working-age population and adds 2.5 million people
a year. He assumes that Boomers will retire at 65 (something which all the
surveys say is not going to happen). And his last estimate is what the unemployment
numbers will be. Everything else is based on those assumptions, which leads
to the first column, or the expected unemployment number.

By the way, we know that everyone will want to make different assumptions.
I am going to create three scenarios, but you can go to Mike's blog and at
the bottom of the post is a link to the actual spreadsheet. Have fun. Let's
look at scenario 1.

This assumes there is no double-dip recession, and jobs roughly rise along
the same lines as the last recovery. Actually, Mish is far more optimistic,
as in the very first chart you will notice that job losses were negative in
the first year after the end of the recession and flat the second year. Mish
has jobs rising by 120,000 next year and 600,000 the second year (2011), and
then a fairly robust recovery. Below is the graph of the unemployment numbers
under such a scenario.

Notice that unemployment stays at or above 11% for three years. Pessimistic?
Mainstream and usually very optimistic Mark Zandi of www.economy.com predicted
this week that unemployment would rise to 11% by the middle of next year, right
in line with this scenario. Also note that total jobs rise by 14 million over
ten years. Hardly doom and gloom. Again, Boomers all retire on time and there
is no double-dip recession.

Let the Good Times Roll

What would it take to get back to 5% unemployment? I played with the spreadsheet
and came up with the following numbers, which get us below 5% by 2020. I assume
no recessions for the next ten years, and 2 million new jobs a year after 2011,
which I start off with almost 1.5 million jobs. Of course, we have never done
that, but let's be optimistic.

And the graph below shows the unemployment numbers for the Good Times Scenario.

Want to get to 5% within five years? Add 3 million jobs a year starting now.
With no housing recovery, a smaller auto industry, and financial firms getting
leaner.

The Quick Double-Dip Scenario

When I called the last two recessions about a year before they happened, it
was not all that hard. We had inverted yield curves, falling leading indicators,
and a lot of other data that pretty much pointed to a recession. Believing
that we had a housing bubble and a looming credit crisis also helped my conviction
in calling the last recession.

I think we are in for a double-dip recession in 2011, yet I readily admit
there will be little if any statistical evidence in advance this time. This
is more of an instinct call. I have serious doubts that we can have what amounts
to the largest tax increase of all time in what will be a very weak (albeit
growing) economy, without putting us back into recession. And Speaker Pelosi
thinks it is a smart thing to add another 5.4% surtax on what will already
be a rising capital gains and dividend tax.

Taxing small businesses, and that is what the tax increase amounts to, is
a very bad idea in a weak economy. Small businesses are where the job growth
comes from. Taking money from productive businesses and giving it to government
is a fundamentally flawed concept.

Now, if they decide to postpone the tax increase, or phase it in slowly, then
maybe we avoid the double dip. But right now it doesn't look like that will
be the case. So, let's quickly see what a double-dip scenario might look like.
Let's be optimistic and assume we only lose another 1.2 million jobs in the
next recession, since we have already lost so many in this one (8 million and
counting). And then the economy comes roaring back in 2012 with 1.5 million
jobs and continues to grow rather smartly for the rest of the decade. No further
recession. We absorb the tax increases and move on with our economic lives.

Unemployment under such a scenario would rise to just under 13% and stay above
10% for 8 years. Take a look at the chart and graph.

Think 13% is too dire? This week David Rosenberg said unemployment would rise
to between 12-13%. The former Merrill Lynch economist was one of the few mainstream
economists who called the recession and the credit crisis. The so-called "Blue
Chip" economists told us at the beginning of 2008 that unemployment would peak
out at 6%. While Rosie is not optimistic of late, he has a rather solid record
of being right.

We are at 10.2% unemployment today. The economy lost jobs for 21 months after
the end of the last recession. That would easily take us into 2011. Another
million lost jobs will take us well over 11% and close to 12% (remember, you
have to add in the increasing population), even without my double-dip scenario.

The letter is getting long and it's getting late, so let me close with a few
thoughts.

First, 12% unemployment is horrendous by American standards. But Spain is
now at 20%, and much of Europe has been in the 10% range for years.

Second, Americans are not used to the concept of 12% unemployment or 10% rates
for extended periods. That is going to cause a serious backlash across the
political spectrum. Couple that with the discomfort over $1.5-trillion deficits
and there could be some serious political changes in the coming years. I think
the message will be more anti-incumbent than one party or the other.

Third, the only way out of this morass is to create an environment where small
business can thrive. As I've noted for the last several weeks in this letter,
government spending does not increase GDP over time. It is a temporary nonproductive
stimulus. It takes private investment to create jobs and increase productivity.
Over the next few months, I will write more about how to do that.

Phoenix, New York, and Thoughts on the Internet

Next week I take a quick one-day trip to Phoenix, then back to do a satellite-remote
speech to a South African hedge fund conference. I will be in New York the
first weekend of December (the 4th) for Festivus, a great fundraiser for kids
sponsored by Todd Harrison and the team at Minyanville (http://www.rpfoundation.org).
Interestingly, they hold it every year at a "Texas" barbecue joint. Look me
up if you are there.

The 7 kids, spouses, and grandkids are starting to gather. We will all have
brunch Sunday and then a shower for Tiffani. She has another 6 weeks before
she is due, and she is really uncomfortable. Walking is literally a pain.

Permit me to reminisce. A little over 9 years ago I started this letter on
the internet with about 2,000 email addresses. It was a new version of what
had been a print letter, as that was the business I knew. The internet was
still a new thing to me, but it seemed like a good idea at the time. Little
did I know.

I am still amazed at the growth and the direction my business and life have
taken. My letters are sent out by various publishers and affiliates to over
1.5 million readers and posted on dozens of web sites, and the numbers have
been growing rapidly of late. I am grateful. But I wonder what would happen
if I started it today. Ten years ago there was little in the way of free economic
letters. Not a lot of competition.

Today, there is so much free information that it's staggering. There have
to be thousands of blogs and hundreds of free letters, some with very large
circulations. It seems a new star is born every few months. While much of it
does not add to the level of conversation, some of it is quite excellent. I
think I am lucky to have started when I did.

And I am grateful for the kind attention you give me. As I turn 60, I note
that this has been a rather overwhelming last ten years. A lot of changes for
me, and almost all of them very good. But there are more to come. The last
two flights I was on I was connected to the internet at 35,000 feet. I sense
a lot more changes coming. I am thinking a lot about how to keep up and not
get left behind, how to make sure that you, gentle reader, continue to get
my best. That is what, at the end of the day, drives me.

Have a great week. I know I shall. Dad loves it when his kids (from 15 to
32) and spouses and grandkids are all under one roof.

Note: John Mauldin is president of Millennium Wave Advisors, LLC, (MWA)
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